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Why should we learn about taxes?

Why is it important to know whether the sale of a certain property is subject to VAT and
Creditable Withholding Tax (CWT), or Capital Gains Tax (CGT)? To put it simply, if you
pay the wrong tax, for example, CGT instead of VAT and CWT, you may be liable for
deficiency VAT and CWT plus penalties, and you would have to undergo a long and
difficult process to get a refund (Good luck in getting a refund!).

Aside from the very painful payment of a lot of taxes, there may be a delay in the r

elease of the Certificate Authorizing Registration (CAR) which you need in order for the
title to the property to be transferred to the name of the buyer.

In addition to the above, VAT should be considered in the pricing of real estate sold.
Note that compared to a capital asset subject to 6% CGT, an ordinary asset will be
subject to CWT of as high as 6% plus 12% VAT. Thus, VAT may make or break a
transaction, or lower the profit of the seller.

When is a sale of real property subject to VAT?


If the seller-taxpayer is a VAT-registered person, the sale of his ordinary asset shall be
subject to VAT.

A person should register as a VAT entity if his gross annual sales and/or receipts
exceed P1,919,500.00 in a year. If he is not originally registered as a VAT entity but he
exceeded the threshold, he should submit BIR Form No. 1905 (Taxpayer Registration
Update) to change to VAT.
When is an asset considered as ordinary? Ordinary assets are those which are:

1. Stock in trade of a taxpayer or other real property of a kind which would properly be
included in the inventory of the taxpayer if on hand at the close of the taxable year; or
2. Real property held by the taxpayer primarily for sale to customers in the ordinary
course of his trade or business; or
3. Real property used in trade or business (i.e., buildings and/or improvements) of a
character which is subject to the allowance for depreciation provided for under Sec.
34(F) of the Code; or
4. Real property used in trade or business of the taxpayer.
In simple terms, real property considered as ordinary assets are those which are used
in the trade or business of the taxpayer. Please read Revenue Regulations (RR) No.
7-2003[3] in full to determine when an asset shall be considered as capital or
ordinary this is also dependent on the classification of the taxpayer.

I also wrote about the Creditable Withholding Tax (CWT)


here:http://www.foreclosurephilippines.com/2009/03/creditable-withholding-tax-in-
real.htmland the Capital Gains Tax (CGT)
here:http://www.foreclosurephilippines.com/2009/02/real-estate-taxation-what-is-
capital.html, you may read the said posts should you wish to learn more about them.

VAT Taxpayer
The VAT taxpayer in this case is a person who is engaged in the real estate
business and is the seller of a real property classified as an ordinary asset. Taxpayers
engaged in the real estate business shall refer collectively to real estate dealers, real
estate developers, and/or real estate lessors. A taxpayer whose primary purpose of
engaging in business, or whose Articles of Incorporation states that its primary purpose
is to engage in the real estate business shall also be deemed to be engaged in the real
estate business.

How about those not in the above list? Registration with the HLURB or HUDCC as a
real estate dealer or developer shall be sufficient for a taxpayer to be considered as
habitually engaged in the sale of real estate. If the taxpayer is not registered with the
HLURB or HUDCC as a real estate dealer or developer, he/it may nevertheless be
deemed to be engaged in the real estate business through the establishment of
substantial relevant evidence (such as consummation during the preceding year of at
least six (6) taxable real estate sale transactions, regardless of amount; registration as
habitually engaged in real estate business with the Local Government Unit or the
Bureau of Internal Revenue (BIR), etc.).
Many ask how are the six taxable real estate sale transactions counted. According to
our real estate mentor, when you buy a property and later sell it, those are counted as
two transactions. I believe this is the conservative position. It will actually depend on the
BIR officer processing your papers. Technically, and as written, it says six sale
transactions.

A person who is not engaged in the real estate business but who is selling real property
which is classified as its ordinary asset is also subject to VAT. This is pursuant to RR
No. 4-07 which provides:

However, even if the real property is not primarily held for sale to customers or held for
lease in the ordinary course of trade or business but the same is used in the trade or
business of the seller, the sale thereof shall be subject to VAT being a transaction incidental
to the taxpayers main business.

Thus, if a taxpayer is engaged in the restaurant business and sells his restaurant
building which he used in his restaurant business, the said sale shall be subject to VAT,
notwithstanding that the taxpayer is not engaged in the real estate business.

Please note thank banks are not considered as VAT taxpayers. Thus, their sale of
foreclosed properties are not subject to VAT. They are subject instead to Creditable
Withholding tax (CWT). Their foreclosed assets, when sold, are considered as ordinary
assets but banks are not considered as engaged in the real estate business.

VAT rate
The sale of properties which may be considered as ordinary assets would be subject to
the 12%[4] VAT effective February 1, 2006.

Tax base of output VAT


The tax base of the 12% output VAT is the selling price (SP) or the fair market value
(FMV) of the property whichever is higher.

If VAT is not billed separately in the document of sale, the selling price stated in the
deed is deemed inclusive of VAT. Thus, to get the selling price without VAT, divide the
selling price in the deed by 1.12. To get the VAT, multiply the selling price without VAT by
.12.

What if the gross selling price in the document of sale is equal to the zonal value or
market value of the property? Will the selling price without VAT be effectively lower than
the zonal or market value of the property? No, the zonal/market value shall be
considered as net of the output VAT.[5]
Please note that the VAT should be separately indicated in the document of sale and
official receipt as there are penalties for non-compliance.[6]

VAT payable
The amount of VAT payable is the difference between the output VAT and input VAT.
Keep the VAT-registered official receipts (for services purchased) and invoices (for
goods purchased) supporting your business expenses so you can claim input VAT
which can reduce your output VAT payable.

Time of payment of VAT


The time of payment will depend on whether a sale is an Installment Sale or a Deferred
Payment Sale. A sale is on installment if the initial payments in the year of sale do not
exceed 25% of the gross selling price. A sale is considered as cash or deferred payment
if the initial payments in the year of sale exceed 25% of the gross selling price. [7]

Initial payments means payment or payments which the seller receives before or upon
execution of the instrument of sale and payments which he expects or is scheduled to
receive in cash or property (other than evidence of indebtedness of the purchaser)
during the taxable year when the sale or disposition of the real property was made. It
covers any downpayment made and includes all payments actually or constructively
received during the year of sale, the aggregate of which determines the limit set by the
law.

In other words, add the downpayment plus all amortization payments (principal portion
only) during the year and compute if the total exceeds 25% of the gross selling price.

A. Deferred payment/Cash basis

The transaction shall be treated as a cash sale which makes the entire selling price
subject to VAT in the month of sale.
B. Installment basis

Each installment payment actually and/or constructively received by the seller is


subject to VAT.
The monthly VAT return should be filed on or before the 20 th day of the month following
the close of the 1st two months of the quarter (February 20, March 20, May 20, June 20,
August 20, September 20, November 20, December 20) while the quarterly VAT return
should be filed on or before the 25th day of the month following the last month of the
quarter (April 25, July 25, October 25, January 25).
Place of payment
The VAT should be paid at the Authorized Agent Bank (AAB) of the Revenue District
Office (RDO) where the seller is registered as a taxpayer. In places where there are
no AAB, the return shall be filed directly with the Revenue Collection Officer or
Authorized City or Municipal Treasurer.

BIR Form to use


The monthly VAT return is BIR Form No. 2550M,[8] while the quarterly VAT return is BIR
Form No. 2550Q[9]

Exemptions from VAT


The following are exempt from VAT:

Sale of residential lot not exceeding P1,919,500.00 (effective January 1, 2012, as


per RR No. 16-2011[10]). If two or more adjacent lots are sold or disposed in favor of
one buyer, for the purpose of utilizing the lots as one residential lot, the sale shall be
exempt from VAT only if the aggregate value of the lots does not exceed P1,919,500.00
(effective January 1, 2012, as per RR No. 16-2011[11]).
In practice, I have heard of cases where adjacent condominium units are bought but the
selling prices are not aggregated for purposes of computing whether the sale exceeds
the threshold. I believe that the reasoning made is that adjacent condominium units are
not the same as adjacent residential lots and thus, the rule on adjacent residential lots
does not apply. This is the aggressive position. [Edit: RR 13-2012 clarified the rules on
adjacent units.]

Sale of real properties not primarily held for sale to customers or held for lease in the
ordinary course of trade or business (in other words, a capital asset);
Sale of real property utilized for low-cost ( i.e. P750,000.00) and socialized housing
( i.e. P400,000) as defined by Republic Act No. 7279 or the Urban Development and
Housing Act of 1992;
Sale of residential house and lot not exceeding P3,199,200.00 (effective January 1,
2012, as per RR No. 16-2011[12]). In practice, condominiums use this amount as the
VAT threshold.